This historic time in U.K. history, in which voters, at 72.2% turnout, tallying “Leave” totaled 17,410,742 versus “Remain” at 16,141,241, does put the concept of the European Union at risk. Cameron’s successor will be tasked to invoke Article 50 of the EU Treaty of Lisbon. Other political figures within the EU have called for an exit, such as in Italy and the Netherlands. Furthermore, pollsters, pundits, prediction markets and politicians greatly miscalculated the referendum vote of Britain exiting the EU. This makes the job of a chief investment officer even more challenging. Whose opinion really matters? Are pundits telegraphing what they want to happen versus what is really going to happen?
Long-Term Institutional Investors
Remember, large pensions and sovereign wealth funds are long-term institutional investors with perpetual-like time horizons. These pools of patient capital have billions upon billions invested throughout Europe. In a recent McKinsey report, “From big to great: The world’s leading institutional investors forge ahead,” a key finding included more asset owners hiring portfolio construction specialists. Asset owners that can develop house views, may have an edge as the concept of analyzing economic scenarios is paramount to the success of wealth fund returns. Sovereign investors such as GIC Private Limited have internal resources and have been looking at a Brexit scenario for over a year.
According to data from the Sovereign Wealth Fund Transaction Database, sovereign funds directly invested US$ 17.85 billion in 2014 and US$ 29.41 billion in 2015 into the United Kingdom. What I find fascinating is that several cash-rich pensions and wealth funds are maintaining a positive tone when it comes to allocating more capital to Britain, while voicing some concern about risk spreading throughout the eurozone. According to the Statistisches Bundesamt, Germany exported €89,288,118,000 worth of goods and services to the United Kingdom in 2015. On the other hand, the United Kingdom exported €38,324,475,000 worth of goods and services to Germany. Does Germany or the U.K. have economic leverage in this picture? Will the U.K. have weaker access to EU markets, or will the U.K. be able to compete with less regulations? Bottomline, Germany, France, and Spain for that matter want the U.K. to exit quickly to avoid further contagion and reduce economic uncertainty (a word that I dislike using). Thus, bond market specialists could see less-resilient economies in the EU experience bond spreads likely widening.
Many sovereign wealth funds have skin in London, choosing to operate their European headquarters in the city. Norway’s Government Pension Fund Global (GPFG), made it publicly-known they will remain a long-term institutional investor in the U.K. regardless of the Brexit outcome. Another large asset owner, the Canada Pension Plan Investment Board, one of the most active public institutional investors, mentioned positive prospects when it comes to investing on the U.K. referendum decision. A CPPIB spokesperson told Reuters on Friday that, “As any investor, we have a bias to stability over uncertainty, yet periods of dislocation can present compelling opportunities that short-term investors are unable to pursue.”
In the end, for some asset owners, they believe outsized returns are possible when excess fear and panic hit markets.
The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
Oman’s State General Reserve Fund (SGRF) is in discussions on forming a US$ 1 billion infrastructure fund. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
The recent false alarm caused by a state employee in Hawaii (who was not terminated and reassigned to a new position), triggering the Emergency Alert System message at 8:07 a.m. caused pandemonium in the state. After decades of failure in diplomacy between the United States and North Korea, the threat of a nuclear missile attack has grown since. The states of Alaska and Hawaii are the closest states to North Korea.
Besides the recent news in the world of nuclear missiles, Norges Bank oversees the management of the country’s sovereign wealth fund. The central bank has moved to ban nine companies from the Government Pension Fund Global. In addition, one company has been placed under observation. The Executive Board of Norges Bank’s decisions on exclusion were made on the basis of recommendations from the Council on Ethics. However, before moving to exclude a company, the central bank may consider other options, such as the exercise of ownership rights. In these instances of companies, the board determined that it was appropriate to use other measures in these cases.
The Council on Ethics’ recommendations to exclude:
Risk of severe environmental damage and serious or systematic violations of human rights
Evergreen Marine Corporation (Taiwan) Ltd
Korea Line Corporation
Precious Shipping PCL
Thoresen Thai Agencies PCL
Unacceptable risk of serious or systematic violations of human rights
Over involvement in the production of nuclear weapons
Huntington Ingalls Industries Inc
Honeywell International Inc (already previously excluded)
Placed Under Observation
Pan Ocean Co. Ltd
The Russian Direct Investment Fund (RDIF) is helping a settlement situation between two Russian economic powerhouses. In January 2018, Sistema, under a settlement, is mandated to pay Bashneft oil company, which is owned by energy behemoth Rosneft, 100 billion roubles (US$ 1.8 billion) by March 30, 2018.
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